Brazos Partners and the Tri-Northern Exit Harvard Case Solution & Analysis

Brazos Partners and the Tri-Northern Exit Case Study Solution

Unfavorable effects of market climate

Apart from the favourable climate effects on Brazos Partner investment strategy, there is an unfavorable effect as well for its third fund, which is that the regulations was tightened and the risk aversion among the lenders was increased, which means that the opportunity was not greater for the debt leverage, and the lenders were highly depending on the equity contributors as well.

In addition to this, the recession or economic downturn had also made the condition worst as there were no more equity available to be invested in. There was a significant fall in the fund raising from the 63.5 billion dollars to 35 billion dollars in the year 2001. Not only this, due to the fact that the operating productivity had been rising, which in turn challenged the buyout firms to add value,however leading to the higher initial prices and better earnings.

Following the acquisition, Brazos create value at the combined distributor

The valuation of the two companies namely;the Northern Video System and Tri-Ed distribution have been performed in order to assess the benefits these two companies tend to generate over the period of time. The enterprise value and the net present value calculation are performed with the intent to evaluate the feasibility of the acquisition initiative.

It is imperative to note that the Brazos Partner has created a value post acquisition, it can be seen in the exhibits provided that the enterprise value or the net present value of the companies i.e. Northern Video System and Tri-Ed distribution is greater than zero or positive. The net present value for Northern Video System and Tri-Ed distribution is $239002 and $178677 respectively. The positive net present value shows that Brazos Partners Holdings Inc. has significantly created the value after acquiring Northern Video System and Tri-Ed distribution. The terminal value is calculated to be $265259 for Northern Video System and $196075 for Tri-Ed distribution. The present value of the free cash flows that is available to the equity provider is calculated to be $$239002 and $178677 for Northern Video System and Tri-Ed distribution. The value is positive and high hence it incorporates all the synergies that tend to be created after acquiring Northern Video System and Tri-Ed distribution.

On the other hand, the synergies gained from the post-acquisition by the start of the year 2012, various measurable gains had been generated for the business by this newly merged acquisition. One of the exclusive indicator of hybrid sales approach were the sales that were coming from the cross selling products. All of the sales from cross selling products which would be generated at the rate of 6.3 million dollars addition to the revenues of Brazos Partners annually on the annual rate basis. Since, there were around 2000 new customer accounts that were acquired by Tri-Northern, hence representing that around 13 million dollars were added in the revenues. In case of adding all the revenues, it can be seen that the revenues are increased around 23 percent from year 2010 to 2012. Not only this, the margins have also significantly increased from 5.2 percent to 5.9 percent during the two year period of time. Additionally, there was a significant increase in adjusted EBIDTA from $19.6 million to $27.4 million. The increased efficiencies and the strong cash flows with the net working capital of the company had significantly improved leverage ratio of Tri-Northern in 2010 from 4.5 x in 2012 to 3.0 x.

The right time to sell Tri-Northern and At what price?

A leading and valuable Dallas based private investment firm Brazos Partner has announced that it would be going to sell Tri-Northern Holdings Inc. which is one of the independent and leading distributor of electronic security products.

Brazos Partner and its management has  formed the Tri-Northern Holdings Inc. through the subsequent merger and the acquisition of the Northern Video System and Tri-Ed Distribution in March 2010. The powerful as well as the strong combination of the knowledgeable technical sales operation and the extensive branch network have significantly positioned Tri-Northern Holdings Inc. as the leading hybrid distribution model in the market of electronic security product.

In addition to this, the Brazos Partner has intended to form a partnership with its management in an attempt to expand the business operations during its ownership both organically as well as via 3 add on acquisition.

It is the right time to sell the Tri-Northern because of the reason that the Tri-Northern has been successful and the company was attracted to Tri-Northern because of the combined market position in the fragmented and growing electronic security product industry and its exceptional management team. The success of the business is a result of the exceptional integration of two business, which in turn have resulted in various synergies, strategic acquisition, expanding via organic growth, extending product line via strong relationship with vendor and achieving operational excellence. Due to the exceptional performance and the tremendous growth, the Brazos Partners should sell the Tri-Northern Holdings Inc. because Tri-Northern would be able to grow into the largest independent distributor of the electronic security products that would help the company in providing value for its end customers and suppliers.

In addition, the company should sell the Tri-Northern Holdings Inc. or it should complete the investment out of its 715 million dollars Brazos Partners Equity Fund III.

Conclusion

The positive net present value shows that the company has significantly created the value after acquiring Northern Video System and Tri-Ed distribution. The powerful as well as the strong combination of the knowledgeable technical sales operation and the extensive branch network have significantly positioned Tri-Northern Holdings Inc. as the leading hybrid distribution model in the market of electronic security product. It is the right time to sell the Tri-Northern due to the fact that Tri-Northern has been successful and the company was attracted to Tri-Northern because of the combined market position in the fragmented and growing electronic security product industry as well as its exceptional management team.In addition, the company should sell the Tri-Northern Holdings Inc. or it should complete the investment out of its 715 million dollars Brazos Partners Equity Fund III.

Exhibit A – Tri-Ed Distribution & Northern Video System

Tri-Ed Distribution & Northern Video System
Tri -Ed Distribution2007200820092010
Net sales201338225366223661245186
Gross profit43542456674772854137
Operating expense38545396503757142604
EBITDA / Free cash flows499760171015711533
Terminal value265259
Discount period0123
Discount factor1.000.930.860.79
Discounted free cash flows49975571.2968707.999155.267236
Discounted terminal value210571.1464
Net present value / enterprise value239002.7004

 

Northern Video System2007200820092010
Net sales141073156611142996150275
Gross profit20679236302065021685
Operating expense17156174001252513160
EBITDA / Free cash flows3523623081278525
Terminal value196075
Discount period0123
Discount factor1.000.930.860.79
Discounted free cash flows35235768.5196967.5936767.42
Discounted terminal value155650.7
Net present value / enterprise value178677.2

 

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